CONTROL LIMITS, VARIANCE INVESTIGATION
Goodsmell Company produces a well-known cologne. The standard manufacturing cost of the cologne is described by the following standard cost sheet:
Direct materials:
Liquids (4.2 oz. @ $0.25) $1.05
Bottles (1 @ $0.05) 0.05
Direct labor (0.2 hr. @ $12.50) 2.50
Variable overhead (0.2 hr. @ $4.70) 0.94
Fixed overhead (0.2 hr. @ $1.00) 0.20 Standard cost per unit $4.74
Management has decided to investigate only those variances that exceed the lesser of 10 percent of the standard cost for each category or $20,000.
During the past quarter, 250,000 four-ounce bottles of cologne were produced.
Descriptions of actual activity for the quarter follow:
a. A total of 1.15 million ounces of liquids was purchased, mixed, and processed. Evaporation was higher than expected (no inventories of liquids are maintained). The price paid per ounce averaged $0.27.
b. Exactly 250,000 bottles were used. The price paid for each bottle was $0.048.
c. Direct labor hours totaled 48,250, with a total cost of $622,425.
Normal production volume for Goodsmell is 250,000 bottles per quarter. The standard overhead rates are computed by using normal volume. All overhead costs are incurred uniformly throughout the year.
Required:
1. Calculate the upper and lower control limits for each manufacturing cost category.
2. Compute the total materials variance, and break it into price and usage variances. Would these variances be investigated?
3. Compute the total labor variance, and break it into rate and efficiency variances. Would these variances be investigated?